Political Risk Predictions for 2011

Just being in the second week of the New Year, I am  continuing with the last Sunday’s post on trends. This week I thought it might be a good idea to understand the world and country risks. Do the political pundits see a better world in 2011 or are they expecting something worse?

Below are three posts giving different viewpoints on political and economic risks. The first one is from Foreclosure Blues titled “The Year of Catch 22”. It is long post and gives a rather dismal view of US political and economic situation. The second post “The Global Economy in 2011: A Rocky Ride or Smoother Sailing Ahead?” is from Knowledge Wharton. It is an excellent post covering economic risks of all major countries and regions. I have put the India section in this post.  The third post “The G-20 is 2011’s Biggest Political Risk” authored by Ian Bremmer and David Gordon is from Harvard Business Review. It discusses that though the world is expecting G-20 forum to resolve global situation, not much good will come out of it.

Click on the headings to read the full posts. Though they are rather long, I would recommend a read to understand the world economic and political risks. It is excellent information to assess country risks and their impact on the organization.

1.    2011 – The Year Of Catch 22 (via Foreclosure Blues)

As I began to think about what might happen in 2011, the classic Joseph Heller novel Catch 22 kept entering my mind. Am I sane for thinking such a thing, or am I so insane that asking this question proves that I’m too rational to even think such a thing?  In the novel, the “Catch 22″ is that “anyone who wants to get out of combat duty isn’t really crazy”. Hence, pilots who request a fitness evaluation are sane, and therefore must fly in combat. At the same time, if an evaluation is not requested by the pilot, he will never receive one (i.e. they can never be found “insane”), meaning he must also fly in combat. Therefore, Catch-22 ensures that no pilot can ever be grounded for being insane – even if he were. The absurdity is captured in this passage:

There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle. “That’s some catch, that Catch-22,” he observed. “It’s the best there is,” Doc Daneeka agreed. – Catch 22 – Joseph Heller

The United States and its leaders are stuck in their own Catch 22. They need the economy to improve in order to generate jobs, but the economy can only improve if people have jobs. They need the economy to recover in order to improve our deficit situation, but if the economy really recovers long term interest rates will increase, further depressing the housing market and increasing the interest expense burden for the US, therefore increasing the deficit. A recovering economy would result in more production and consumption, which would result in more oil consumption driving the price above $100 per barrel, therefore depressing the economy. Americans must save for their retirements as 10,000 Baby Boomers turn 65 every day, but if the savings rate goes back to 10%, the economy will collapse due to lack of consumption. Consumer expenditures account for 71% of GDP and need to revert back to 65% for the US to have a balanced sustainable economy, but a reduction in consumer spending will push the US back into recession, reducing tax revenues and increasing deficits. You can see why Catch 22 is the theme for 2011.

2.     The Global Economy in 2011: A Rocky Ride or Smoother Sailing Ahead? (via Knowledge@Wharton)

India: Muscling Ahead

In India, December 2010 saw corruption charges rise to a crescendo and a whole session of Parliament was lost as opposition parties, demanding deeper investigation into the scams, refused to let it function. None of the political parties wants a fresh election, so this government will continue. But its trajectory has obviously been affected. “The political climate is uppermost in the investor’s mind,” says Vallabh Bhansali, chairman of Enam Securities, a capital market services firm. “If there are policy logjams, they could create confusion.”

But the economy is expected to muscle ahead regardless. Estimates of GDP growth vary from 9.7% (the IMF prediction for 2011) to 7.7% (the Credit Suisse prediction for fiscal 2011-12). Credit Suisse is a rare pessimist; almost everybody else has upped their forecasts. The government projection is 8.75%, with a possible 0.35% addition. “India is on a mission to get its annual GDP growth to 10%,” according to Bundeep Singh Rangar, chairman of IndusView, an advisor to MNCs seeking opportunities in India. “A good monsoon [season] and a strong global recovery could make 2011 the year that India achieves that goal.”

The Bombay Stock Exchange sensitive index (Sensex) should keep pace with GDP. “By the end of 2011, the Sensex is likely to be between 24,000 and 25,000,” says Rajinder Sabherwal, who manages a macro fund called Magister Ludi Global. The New York-based Sabherwal, however, doesn’t think India will be a top performer in the markets. “India is a defensive holding for us. It sells at a premium. To some extent [that is] justified, but [it] is vulnerable to inflation and rising oil prices. In emerging markets, we prefer Turkey, Russia, Thailand, Korea and Poland.” Sunil Bhandare, advisor (economic and government policy) at the Tata Strategic Management Group, sees a 12% to 16% growth in the Sensex over current levels (around 20,000 at the end of December).

One big worry is inflation. Dharmakirti Joshi, chief economist at credit rating agency Crisil, says inflation will be the biggest challenge in 2011. His other concern is the impact of rising capital inflows on the rupee. Naresh Takkar, managing director and CEO of credit rating agency ICRA, also lists inflation as a top concern, especially in commodity prices. He sees improving international economic sentiment as a “double-edged sword” for India. “Sectors that are dependent on international demand will benefit, but commodity prices will see a further upturn,” he says.

If inflation climbs, the Reserve Bank will have to hike interest rates. This could result in “some moderation” in the growth rates of investment and private consumption, according to Joshi. Bhansali also sees “a bit of a cyclical downturn in growth, but it may be only a few quarters or a few months.”

It’s on the reforms front — inextricably linked to politics — where there is the greatest amount of uncertainty. Much could happen. Joshi pins big hopes on the proposed new goods and services tax, which he describes as a “game changer.” A slow approach would be just right for new banking licenses, suggests Rajesh Chakrabarti, finance professor at the Indian School of Business. “The dominant view is that caution and safety are key, and no rush towards greater liberalization is warranted.” He also expects the recent corruption scandals to create a bigger role for the government, “as the false assurance of the cleanliness of the private sector is now gone.”

“There are far too many policy reforms that are pending, but unfortunately, the parliamentary system has been bogged down by controversies, scams and corruption. No substantive reforms could move forward during 2010,” says Bhandare. “Our political parties must realize the adverse consequences of their actions.”

 3.    The G-20 is 2011’s Biggest Political Risk (via Harvard Business Review)

Among the acute political risks facing the world this year, the nuclear threats from Iran and North Korea are serious, no doubt, but the behavior of the 20 major economic powers scare us more: these countries can no longer agree on how the global economy should function.

“Oh, come on,” you might say. “When did the world’s leaders ever agree on anything?”

But, there used to be a pretty good understanding among the dominant economies on matters such as currencies, capital flows, and economic globalization, and the major players were willing to put their heads together to solve crises.

No more. The major economic powers are pushing their own agendas and using the key institutions that should be providing global governance as arenas for confrontation instead of collaboration.

This enormous change ushers in an era of growing political risk. It doesn’t have an official name yet, but we propose calling it the “G-Zero,” as in zero collaboration. It is the first item on the Eurasia Group’s Top Risks for 2011.

Before the global downturn, the G-7, and then the G-8 (including Russia), coordinated governance on key economic issues. The G-8 was superseded by the G-20 during the financial crisis, and at first the members cooperated well to prevent a global economic collapse. But the initial collaboration was misleading — it turned out to be merely a reaction to panic.

The first serious cracks in the group started showing in Copenhagen a year ago, following a climate summit marked by such disunity that the outcome was worse than if no meeting had taken place. Then, last fall, both the International Monetary Fund meeting in Washington and the G-20 meeting in Seoul ended with warnings of looming conflict. “We’re in the midst of an international currency war,” Guido Mantega, Brazil’s Finance Minister, said last September.

Well, this information does not give much comfort. The message is that do not view the world through rose-tinted glasses in 2011. It is a rough ride ahead and we have to be prepared. So let us keep a realistic view and still hope for the best.